Question

Opal, a resident company, was incorporated in 2001. The company has developed a revolutionary lithium battery for electric cars, which it manufactures in Australia and exports overseas to its branch offices for distribution. During the year ended 30 June 2021, Opal expanded its operations by acquiring the assets of WM Pty Ltd. As at 25 October 2020, the cost of this acquisition was $3,240,000 constituting the following items: 

 Land 1,700,000 

Buildings – constructed in 1968 700,000 

Accounts receivable (Debtors) 100,000 

Plant and machinery 540,000 

Goodwill 200,000

Total cost of acquisition 3,240,000 

The following information has been extracted from accounting records of Opal for the year ended 30 June 2021. 

Revenue 

Gross trading income 4,070,000 

Interest received from US bank after 15% US withholding tax was deducted 12,500 

Interest on debenture in a resident public company 24,000 

Profit on sale of fixed asset – furniture 5,200 

Lump Sum form CP Bank 280,000 

Profit on sale of Land 40,000 

Total revenue 4,431,700 

Expenses $ 

Cost of borrowing funds to finance working capital 3,200 

Depreciation (includes depreciation of building) 190,000 

Entertainment expenses 74,000 

Legal expenses 96,000 

Loss from collection of trade debtors acquired on acquisition of WM 44,000 

Provision for annual leave 152,000 

Repairs and maintenance 185,000 

Write off of one-tenth of Goodwill 20,000 

Other expenses (all allowable deductions) 1,600,000 

Total expenses 2,364,200 

Net profit 2,067,500 

Other information 

1) In January 2021, Opal lent $700,000 to a subsidiary company, Opal Plus Pty Ltd, for a period of 5 years at an interest rate of 10% pa. It was an interest only loan with the full principal required to be paid to Opal at the end of the 5-year period. In March 2021, Opal sold the right to receive interest for the 5-year period to CP Bank for a lump sum payment of $280,000. 

2) On 1 January 2021, Opal borrowed $250,000 for three years at 8% interest to finance working capital. The borrowing costs amounted to $3,200. 

3) Depreciation It is the company policy to adopt the same tax rate of depreciation for accounting purposes on all fixed (non-current) assets other than buildings. The accounting depreciation of buildings amounted to $30,000 for 2020/2021. Apart from the extension to the office buildings all buildings were constructed prior to 1960. The company has elected to depreciate all assets (including motor vehicles) on the prime cost method and not diminishing value. Depreciation in the accounting report includes all assets acquired during the year, and excludes any profit or loss on the sale of a depreciating asset. 

4) Fixed assets disposed of during year were: 

• Furniture– Cost 16 January 2019 $8,000 

Written down value for accounts/adjusted value for tax $5,852 

Proceeds on 20 June 2021 $11,052 

5) Additions to fixed assets during the year: 

• Extension to office building 

• Construction commenced on 1 August 2020 and occupation on 1 June 2021 $300,000 

• Motor vehicle (100% business usage) - Purchased on 1 July 2020; estimated life 8 years $85,000

6) Entertainment expenses of $74,000 were spent on meals at restaurants. The company records show that 100% of the total expenditure was for entertainment of business clients. 

7) Legal fees $96,000 comprised: • Debt collection $5,000 • Redrafting the company’s constitution $6,000 • Defending directors against criminal charges $85,000 

8) Annual leave paid during the year was $80,500 

9) The company has incurred the following expenses which are classified as repairs and maintenance in its accounting records. 

• Cost incurred in early November 2020 to replace the roof of an administrative office building acquired from WM. The work was completed on 1 February 2021. $80,000 

• Cost of converting an old warehouse into a lunch room and change room for company employees. Completed 1 May 2021 with an estimated life of five years: 

- Installation of showers and toilets $40,000 

- Partitioning and panelling the walls $20,000 

- Furniture for the lunch room $10,000 

• Repairs to machinery $35,000 

REQUIRED: 

1. Prepare a report for Opal’s Chief Financial Officer (CFO) that addresses the tax treatment of the items listed above (Assuming Opal is not a small business entity). (18 Marks) In your report, you are required to provide explanations for your answers AND refer to relevant statutory provisions, cases and /or rulings.

2. Calculate Opal’s taxable income and income tax payable for 30 June 2021. You are to use the attached table to complete your tax reconciliation/calculate tax payable.